Monetary policy

What is the two-tier system?

Against a background of negative interest rates (see What does it mean if interest rates are negative?), the two-tier system for remunerating excess liquidity holdings allows for a reduction in the negative remuneration on banks’ total excess reserves.

In order to support the bank-based transmission of monetary policy, at its meeting on 12 September 2019, the Governing Council of the European Central Bank (ECB) decided to introduce a two-tier system (TTS) for the remuneration of the reserves held by banks in their current accounts at their national central banks.

The two-tier system has been applied since 30 October 2019. The Governing Council decided that the exempt tier would be equal to six times (multiplier) the minimum reserves and remunerated at 0%. The multiplier is the same for all banks and is set such that euro short-term money market rates are not unduly influenced. It may be adjusted over time in line with changing levels of excess liquidity. The remuneration may also be adjusted by the Governing Council if deemed necessary. The second (non-exempt) tier comprises all the excess reserves held by banks in their current accounts exceeding that threshold and will continue to be remunerated at 0% or the deposit facility rate, whichever is lower (see the Diagram).

The two-tier system does not apply to holdings at the Eurosystem’s deposit facility or to the reserves held in other central bank accounts that are not used to fulfil minimum reserve requirements.

Following the raising of the deposit facility rate to above zero, the two-tier system for the remuneration of excess reserves is no longer necessary. The Governing Council therefore decided in its monetary policy meeting of 8 September 2022 to suspend the two-tier system by setting the multiplier to zero (see press releaseOpens in a new window).